The House tax bill’s approach would make the end of 2017 the deadline for hospitals to issue tax-exempt debt.

Nov. 8—Hospital advocates are opposing a provision in major tax overhaul legislation that would eliminate tax-exempt borrowing for not-for-profit hospitals.

The American Hospital Association (AHA) this week urged the leaders of the House Ways and Means Committee to eliminate a provision in the Tax Cuts and Jobs Act that would eliminate the tax exemption for 501(c)(3) hospital bonds and advance-refunding bonds.

"The AHA urges the committee to drop these two harmful and unwarranted provisions, which we believe will work against the intended purpose of the bill and severely hamper hospitals' ability to meet the health care needs of the future," Tom Nickels, executive vice president for AHA, wrote in a letter to committee leaders.

Under the bill, tax-exempt bonds issued before Jan. 1, 2018, would retain their exempt status, thus exempting the interest income generated from federal tax for the holders. Mark Rountree, leader of the US Health Sector Tax Practice for EY, said that “any ‘advance refunding’ of such bonds would, in general, result in the refunding bonds not being exempt in nature.”

Although bond underwriters said advance refundings comprised 25 percent of bond-related activity in 2016, “The reality is there weren’t that many hospitals out there left with the opportunity to do an advance refunding, and if they give up on that opportunity it’s not going to be the end of things,” said Pierre Bogacz, managing director of HFA Partners. “They’re giving up on some savings, but it is not critical.”

Dan Steingart, a vice president in the nonprofit healthcare practice for Moody’s, said the legislation continues to change, and the current version does not account for a Senate bill that is expected to be introduced this week.

Rountree noted that the House continues to debate and make amendments to its bill. AHA noted that Rep. Randy Hultgren (R-Ill.) renewed a push this week for House leadership to protect the tax-exempt status of private-activity bonds as part of tax reform efforts.

Ultimately, the House and Senate will have to reconcile major differences between their two bills after each chamber passes its version.

Senate Bill Concerns

Early indications are that the Senate bill will change the corporate tax rates, which concerns municipal bond markets because bank and insurance company investors make up 25 percent of existing tax-exempt municipal bond holdings, Bogacz said.

If the Senate bill succeeds in lowering the corporate tax rate from 35 percent to 20 percent, the after-tax yield that investors receive on municipal bonds becomes less attractive compared to taxable yields, which would make borrowing more expensive for hospitals.

If corporate tax rates change, bank placements would become an immediate problem for hospitals, Bogacz said, because they usually contain language that gives the lender the right to increase rates in response to tax policy changes.

House Bill Concerns

The House tax bill’s approach would establish a deadline of the end of the year for hospitals to issue tax-exempt debt.

“They’re rushing to get deals done before the end of the year that were already on the table,” Steingart said in an interview.

More details are needed to clarify the bill’s impact on future hospital borrowing, he said.

If the tax-exempt bond market for hospitals were ended, they would have to turn to the taxable bond market, which is only slightly more expensive than the tax-exempt market because of currently low interest rates, Steingart said.

“We’ve had issuers borrowing in the taxable market for quite a while,” Steingart said. “It’ll become a greater expense as interest rates rise and you have more of a differential between the tax-exempt and the taxable markets.”

Taxable debt has been increasingly popular among hospitals, Bogacz said, due to the low rates.

So far, the legislation appears to have had little effect on pending bond deals—other than causing some parties to accelerate deals that had been scheduled for early January, he said.

“If you were going to be in the market on Jan. 10, then it behooves you to move the deal up a couple weeks so that you can take advantage” of tax-exempt bonds, Steingart said.

However, hospitals looking to accelerate bond deals should tread carefully, Bogacz said.

“If you want to speed it up, you’re going to give up on terms,” Bogacz said. “If you skip any steps, then you end up with less-than-optimal terms.”

If tax legislation eventually fails to pass Congress, then hospitals racing to finalize last-minute bond deals would have depleted resources that they could have used for other purposes, such as undertaking an audit, he said.

“In situations like that, either hospitals have some kind of refunding or some kind of bond issue on the table and they can speed it up before the Dec. 31 deadline in the House bill, or they’re going to be doing some financing next year and there is nothing they can do about it,” Bogacz said.

The legislation would not eliminate tax-exempt borrowing for public hospitals.

Some bond writers have discussed using private placements that close before the end of the year and flipping them “into long-term financing later because we beat the deadline and it’s going to be grandfathered at that point,” Bogacz said.

Bogacz said in an interview that hospital clients don’t appear as worried about the potential change as bond underwriters are. Bond counsels have told him that if Congress fails to pass the bill this year and tax reform is still under consideration in 2018, then “the tax-exempt bond markets are going to effectively shut down.”

Investors in tax-exempt deals require the opinions of bond counsels, who Bogacz said will not give “a clean opinion” on bonds issued after Jan. 1 because of concerns that the bond-related tax provisions of the legislation would be retroactive to that date.

“If there isn’t an updated deadline, it is going to shut down the bond market until the bill is finalized,” Bogacz said.

Rich Daly is a senior writer/editor in HFMA’s Washington, D.C., office. Follow Rich on Twitter: @rdalyhealthcare

Publication Date: Wednesday, November 08, 2017